Saving "the Market” out of Cambridge: “Pareto Ultimatum”

 

Economists are fond of supposing “perfect information” while physicists of “frictionless world.” Sounds great! Unfortunately, if you say so you are short-sighted.

            First, who with perfect knowledge would raise the cows, or for that matter create a new business? Absolutely positively no one would do that because there will not be such a thing as a profit. In other words, if you did you wasted your time that is limited to 125 years on this side of world.

            Second, all of us without frictions would exist, if ever, as a dust, a rock or an asteroid depending upon the mass, or “weight” if you will.

            C’est la vie, we’ve got to love imperfect knowledge as is and physical frictions as are.

            Let’s take a break and suppose a market without perfect knowledge. More specifically, every demander and every supplier is able to make all the profit-loss calculations correct but unable to know anything about other participants.

            As anyone can imagine, the paring is perfectly random in the given community and in the defined accounting period. Again, the community and the period are necessary conditions to making calls about the quantities and the prices.

            There is a possibility, however remote may it be: Each and every exchange is at the marginal utility of the buyer and the marginal production cost of the seller. The consequence: The quantity traded could possibly be double the “equilibrium quantity” as called by economists; prices are all different erasing all the surplus of community. That is “Pareto ultimatum,” where the least productive sells to the most desperate, the second least to the second most, and so on so forth. None wins nobody loses. So nice! Is it so good, too?

            Is Pareto ultimatum desirable? Depending upon the answer, I’ll tell you who you are.

Yves Montand - C'est Si Bon!

Percy Sledge - What Am I Living For?

 

Note: Pareto ultimatum is possible when the demand schedule is the mirror image of the supply. All pairings are horizontal, each connecting the demand and the supply out of the identical isosceles triangles left and right. There is neither a winner nor a loser, while everyone “thinks at the margin” as per Gregory Mankiw’s Principle #3 (Principles of Economics).

            The “real quantity” of production gets doubled without getting anybody better-being. Long live, all the “real quantities”! Viva, las believers in “real”!

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